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Playing the Pricing Game

As the economic slowdown continues—the positive early start to the holiday shopping season notwithstanding—some businesses are wondering if they will soon face deflation: a general decline in prices caused by slack consumer demand producing excess inventory.

Relying on analytic software from developers such as Zilliant Inc. and Business Objects SA to manage pricing and promotions is one tool companies have to combat continued economic stagnation.

Zilliant, which develops analytical software applications for determining pricing, last month released Version 4.0 of its Zilliant PRO (Profit and Revenue Optimization) application, which can manage up to thousands of ongoing price decision recommendations and rank, sort and compare the potential impact of those recommendations.

This version also offers enhanced modeling algorithms for making recommendations for negotiated price ceilings and floors. This feature could be used as a negotiating tool for salespeople.

Further reading

Zilliant PRO 4.0 includes a Deployment Module option for managing the deployment of price changes into third-party operational systems using XML, Simple Object Access Protocol and published APIs. It can track those changes to analyze their results.

Despite these specialized tools, some companies manage pricing through traditional analytic applications. Hardware retailer TrueValue Corp., for instance, uses analytic and dashboard applications from Business Objects to manage price elasticity as well as promotions.

TrueValue discounts up to 200 products a month. It tracks customer responses to these discounts using Business Objects namesake technology and adjusts pricing accordingly based on the success of the discounts. The software helps TrueValue decide whether to lower prices further to spur more demand or replace the product in the discount offer if the reduced price fails to generate additional demand.

"We can watch [product movement] velocity at our distribution centers and see how theyre affected by the price changes," said Neil Hastie, TrueValue CIO, in Chicago. "If we reduce the price by 2 points, say, we can see if were making up the lost margins with velocity."

Business Objects technology also helps TrueValue manage promotions, tracking customer response to promotions geographically so that products being promoted can be transferred to the companys distribution centers in the regions where the promotion has been most successful.

"Prior to installing Business Objects, we had a lot of unproductive inventory sitting in warehouses," Hastie said.

Whether its a specific promotion, such as a recent electric carving knife giveaway for Thanksgiving, or price discounting, the challenge for TrueValue is to increase customer spending at its retail stores, according to Hastie.

"Consumers have a lot of money, but theyre holding on to that money for as long as possible," he said. "Every retailer in the world will tell you that."

Consumer spending has heretofore propped up the economy as business-to-business spending and investment has dropped off, said Robert Blattberg, a professor at Northwestern Universitys Kellogg School of Management and director of that schools Center for Retail Management.

Blattberg said fears of deflation are largely overblown at this point, although aggressive pricing and promotions are still key to most retailers successes.

"Overall consumer spending hasnt dropped, but consumers have become more price-savvy," said Blattberg, in Evanston, Ill. "They wont pay higher prices if they dont have to."

Large-volume discounters like Costco Wholesale Corp. and Wal-Mart Stores Inc. have driven prices down and required higher-margin retailers to keep up, Blattberg said. He said TrueValue has had to deal with this as well from the likes of The Home Depot Inc. and Lowes Companies Inc.

"The discounters understand pricing analytics much better than the high-priced retailers do," said Blattberg. "There has truly been a growth in the use of analytical tools to manage pricing."

The increased use of analytics to manage pricing does not, however, signal the re-emergence of dynamic pricing, Blattberg said. Amazon.com experimented with dynamic pricing more than two years ago, charging different customers different prices for the same products. The Seattle-based online retailing powerhouse maintained it was only conducting random pricing tests, not basing prices on customer profiles or previous shopping behavior.

In any case, the experiment ended after two weeks and the company ended up paying nearly $21,000 in refunds to disgruntled customers.

"It sounded good, but it didnt work for Amazon," said Blattberg. "Airlines still do it a lot, but theyre not exactly an example of an industry thats doing well."

Effective pricing is only one part of the equation to help retailers remain profitable.

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